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Wednesday, October 17, 2012

Middle Class Income and Aren't We All In This Together?

What's the proper definition of middle class when it comes to earned income? Or is the question better asked as how many people can we classify as middle class for the purpose of securing the maximum number of votes for our guy?

In any event, let's allow a few facts to interrupt the politicians and decide for ourselves what middle class income means. It certainly doesn't mean income of $250,000 and above, and that level of income doesn't automatically make somebody a millionaire or billionaire either.

Politically middle class seems to be a Humpty Dumpty world where "When I use a word, it means just what I choose it to mean - neither more nor less."

"The number that both Obama and Romney use to define the “middle
class” might be too high.

It seems as though no one reads the Census annual publication Income,
Poverty, and Health Insurance Coverage in the United States for anything but the
number of people in poverty. The parts I find most interesting are those
pertaining to the level and distribution of income. The numbers go to the heart
of conversations about the “middle class” and the “rich.”

Both President Obama and Governor Romney have adopted household income of
$250,000 as a meaningful demarcation point for defining the middle class. In the
case of the President, he proposes to retain the Bush tax cuts for households
with less than $250,000 and eliminate the tax cuts for those above that
threshold. Governor Romney in a recent ABC interview offered the same definition
of the middle class: “Middle income is $200,000 to $250,000 and less.”

Where does this concept of $250,000 as the appropriate cutoff come from?
According to the data in the Census report shown in Table 1 below, which
presents the thresholds for being in different parts of the income distribution,
the median household in 2011 had an income of $50,054. A household with an
income of $143,611 was at the 90th percentile point, or in the top 10th of the
income distribution. A household with an income of $186,000 was at the 95th
percentile, or in the top 5 percent. The table does not even show households
with $250,000, but they must be in the top 97th or 98th percentile.

Household Income at Selected Percentiles, 2011

Percentile

Dollar
Limit

10th

$12,000

20th

$20,262

50th (median)

$50,054

80th

$101,582

90th

$143,611

95th

$186,000

The thresholds must be interpreted with caution because households include
old and young, urban and rural, coastal and midland, and small and large. But it
is very hard to understand how anyone could think of $250,000 as the middle. It
seems like both candidates have a mental picture of the very rich and everyone
else.

The “very-rich-versus-everyone-else” framework may come from data on the
share of income earned by various households. Here the Census data show that
those in the top quintile – the highest-earning 20 percent – earn more than the
bottom four quintiles combined (see Table 2). That is, the top 20 percent
receives more income than the bottom 80 percent.

Shares of Household Income by Quintile, 2011

Quintile

Share

Lowest quintile

3.2

Second quintile

8.4

Third quintile

14.3

Fourth quintile

23.0

Highest quintile

51.1

And a recent study by Emmanuel Saez shows that within the top quintile the
distribution is also very skewed, so that the top one percent receives about 20
percent of total income.

Thus, while the $250,000 threshold makes no sense in describing the middle
class, it seems like a relevant divide for defining where the money is.
Nevertheless, dividing the nation’s households into the “wealthy” and “the
middle class” doesn’t seem like a useful exercise. It pits the majority of
Americans against the top 1 or 2 percent. It suggests that the majority of
Americans should not be called upon to solve the nation’s fiscal problems. It
violates the notion that we are all in this together. Yes, the rich can
contribute more, but we can all contribute something."Summing UpThe middle class income level is $50,000. Getting into the top 20% of earners means $100,000. $186,000 gets a person into the top 5%.Thus, the real question gets down to who's going to pay what part of the entitlements and other government spending programs? The top 1%, the top 5%, the top 10%, the top 50% or everybody who can afford to pay, even if it's a small amount?And even if we all pay, how can we ever expect to be able to afford this current level of government and entitlements spending in a consistently slow growing, government run and high unemployment economy?So just maybe we're being asked all the wrong questions by government officials.Maybe the right question is how do we grow the economy.And accordingly, it's not the "middle class" against the fat cats after all.Maybe 100% of We the People are in this tax, government spending and entitlements thing together --- or at least should be.Thanks. Bob.